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Should You Use Your IRA to Buy an Investment Property?

With taxes going up for most people, you might be paying more attention to your tax-deferred retirement investing options, such as your Individual Retirement Account (IRA).

And with property prices going up, you might ponder whether you can invest those IRA funds in real estate to both defer (or eliminate) taxes and earn a fair rate of return.

Putting your hard-earned IRA assets into a “self-directed” IRA can be a very good idea to grow long-term, tax-deferred or tax-free assets. But it doesn’t work for everyone.

Here are a few things you should consider.

Eligible properties

The real estate you buy must be a business property, not a personal residence, second home or occasional rental.

Also, you can’t use your IRA to buy a property you already own; it has to be a new purchase directly into the IRA.

If you wanted to buy a rental property, you would open an IRA custodial account, transfer cash from an existing IRA account — or possibly 401(k) — into the custodial account and then purchase real estate under the IRA account name.

Very specific rules outline what you can and cannot do in funding and managing the investment, so make sure to get good advice on those rules.

You can also buy and sell real estate in a self-directed IRA if you are in the flipping business, but there are limits on how many you can do per year.

The profits on any transaction would be tax-deferred or tax-free and allow your IRA to continue to grow with those tax advantages.

IRA investing concerns

You can’t get a traditional mortgage loan in an IRA, so you really need to have enough money in your IRA to purchase properties for cash if you plan on having the property as a long-term rental.

There are also costs to administering the IRA, so factor those into your calculations when penciling out any real estate investment.

And you cannot write off losses or depreciation from any investment property in an IRA, so there won’t be the traditional tax savings you’d get on rental properties.

Lastly, if you fail to comply with any of the rules, it may kill your IRA and cause you many tax penalties.

Financial considerations

Don’t put all of your IRA eggs into one basket. Too many people don’t properly diversify their retirement assets — present company included.

It would be smart to talk to a financial adviser on how to allocate all your investment savings into different assets, based on your age and risk tolerance.

If you want to use your IRA to buy real estate, you need to understand what you can and can’t do. More key information can be reviewed at udirectIRA, which is a self-directed IRA custodian.

And as always you also should get professional guidance from an accountant and lawyer.